On the long road of life, there is that exit called Retirement. While everyone’s senior age varies, the question remains the same - What can I do now to prepare for the future? Although there are many different options available, one to consider is an annuity. But exactly what is annuity and how does it work, you may ask; let me explain.

An annuity is a contract between you and an insurance agency in which you invest money, which the agency in turn invests into other financial venues. You will make payments either in one lump-sum, or in a series over a designated period of time. The insurance company agrees to then return a payment to you either now, or beginning on a future date (usually when you retire) after senior annuity calculation. Annuities are tax-deferred, meaning they are not held subject to taxation until you begin drawing or taking money from the account, and cannot be drawn from without penalty until a certain age.

Annuities are both an insurance policy and an investment, in that, they not only offer death benefits, and protection of your investment, but can also be seen as protection of income, as they generally have a higher return interest rate than bank investments or CD’s. This is a great benefit for parents, as, in the event of death, your beneficiaries would receive your annuity return for years to come.

There are a few different types of annuity, each with their own pro’s and con’s. The first is a fixed annuity, in which you are guaranteed a minimum payment on a regular basis no matter how the stock market stands or the economy is holding up. These fixed payments can be made to you either for a set period of time, or over the life of yourself or your spouse. Fixed annuities are similar to a bank CD in that they have a set interest rate, but often have a higher return and greater security, making it the perfect option for those more conservative who want a guaranteed set amount during retirement.

Variable annuities allow you to choose to invest payments among many investment options, usually mutual funds. These differ from fixed in that your rate of return depends on how well your investment options are doing. While you have the potential to make more than a fixed annuity, you run the risk of having an investment bottom out. They normally have to stages, the accumulation phase and payout phase.

During the Accumulation phase, you choose how you spend your money in what area. For instance, you can put 20% in bonds, 25% in U.S. stocks, 25% in International stock, and 30% in a fixed account. The fixed account is much like a fixed annuity in that it has a set interest rate. You can change how much you want to put where, in order to try and get the greatest return, although some of those exchanges could cost you in fees. In order to choose the best option, it is wise to request a prospectus- or an outline of the annuity contract. These can help you make the best decisions depending on your situation.

The Payout phase is where you start to see your return. Your payments are made back to you, along with any interest you may have gained. So if your investments in stock made more that what you paid, you would receive the portion of that along with your original payment. However, the amount of payment depends on how well or poorly the investment did over it’s life. As an added bonus, variable annuities are regulated by the Securities and Exchange Commission.

IRA’s and 401k’s offer many of the same benefits and tax-deferred settings as annuities, and many financial advisors consider it wise to fully invest in those before moving to annuities. There is the option to use a variable annuity through a 401k, which allows you the freedom to choose where you want your investments to go. However, be advised that, just because you are using two tax-deferred methods does not mean that there are any extra tax advantages. They remain the same regardless.

While the promise of huge payoffs and too-good-too-be-true offers seem great at the time, it is safer to go with a well-established company with a good background and credible offers. Always make sure to request a prospectus to give you an inside view of how the investment option works and is holding up, and understand that there will probably be fees and charges related to it. A financial advisor can help you make a decision on which type of annuity is best for you.

If you are looking for a way to increase your current retirement package, be sure to do some senior annuity calculations and see if any type of annuity is right for you!